The Greenhouse
by Pine

Cleaning Up Your Credit File Before You Get A Mortgage

It takes time to clean up your credit file, so start the process as soon as possible if you want to ensure your score is strong enough to secure a mortgage.

The Path to Better Mortgage Rates Starts with Your Credit Score

Are you thinking of buying a home? Then you might want to check your credit report and give it a clean-up job. 

Getting a mortgage is much easier if you clean-up your credit file before applying to lenders. This will help you get the lowest interest rates and best terms on your mortgage, making it more affordable and manageable for you. 

Read on to find out how to prepare your credit file before applying for a mortgage. 

What Lenders Look At When You Apply For A Mortgage

Every mortgage lender looks at your credit score and it impacts the interest rate they offer you. 

A higher score likely means that you'll make your payments on time, while a lower score increases the risk that you'll miss payments and potentially wind up in default. Understandably, lenders want to avoid the latter.

The good news is that lenders usually consider the bracket that your credit score falls under rather than a specific score. This gives your lender a better idea of how much risk they'll be assuming by taking you on as a client:

  • 800 - 850: Excellent credit. You are considered low-risk and may have an easier time getting approved for a mortgage.
  • 740 - 799: Very good credit. You have a history of positive credit habits and may have an easier time getting approved for a mortgage.
  • 670 - 739: Good credit. You are considered to have acceptable credit and are a lower-risk borrower.
  • 580 - 669: Fair credit. You are considered a subprime borrower, which means you are a higher risk for the lender. You'll likely have more difficulty getting approved for a mortgage.  
  • 300 - 579: Poor credit. You may have difficulty getting approved for a mortgage and will likely have to take measures to improve your credit score before applying.

Check Your Credit Score For Free 

Credit scores are easily accessible online. You can check your credit score for free with the two major credit bureaus in Canada: Equifax and TransUnion. Some services, like CompareHub, also allow you to check your score online. 

When you check your credit score for free, most providers show you either an Equifax or TransUnion score. 

What Credit Score Do You Need To Qualify For A Mortgage?

Generally speaking, the minimum credit score required to secure a mortgage is 640. That said, lenders are typically looking for a credit score within the range of 620 to 680 as a minimum.

Every lender is different. They all have their own scoring methods that borrowers may not be aware of. Not only that, but your credit score may differ slightly between Equifax and TransUnion.

How To Clean Up Your Credit File Before Applying For A Mortgage

Here are some easy ways to clean-up your credit score. It can take a few months before any real change appears, but it is worth it. 

Check Your Credit Report For Errors

Cleaning up your credit report typically starts with scanning it to ensure all information is accurate. Mistakes on your credit report can unfairly pull your credit score down. This is why you should check your report regularly to ensure its accuracy. 

If you notice any mistakes, have them investigated and fixed right away. Not only could these errors drag your score down, but they can also be a potential sign of identity theft. 

Build Your Credit History 

Whether you're new to Canada or are a young adult just starting out your financial life, you'll need to build your credit profile from the ground up. Here are a few ways to start building your credit profile:

Try credit-building products. A handful of companies in Canada offer credit-building products. KOHO, for instance, offers its Credit Building plan, which is a credit-building line of credit.

Apply for a secured credit card. This type of card is secured through a deposit you make. Your credit limit will likely be similar to your security deposit. 

Use rent reporting services. If you rent, have your rent payments reported to Equifax. Some popular rent reporting services include City Lending Centers, Landlord Tenant Bureau, and Chexy.

Get your international credit file recognized in Canada. It can be tough for newcomers to Canada to access credit products. But services like Nova Credit help you bring your foreign credit history to Canada.

Pay Off Some Outstanding Debt

Even with a high income, your outstanding debt can create a hurdle for you when you apply for new credit. Before applying, pay down as much of your debt as possible. More specifically, you'll need to get your Total Debt Service (TDS) ratio down. 

Your TDS looks at how much of your monthly income goes toward debt repayment. This includes all your debts, including housing expenses, car loans, credit card payments, and student loans, among others. Lenders want to see a TDS of no more than 44%. 

To keep your TDS under this threshold, consider doing the following:

  • Pay down your high-interest debt, such as credit cards
  • Pay down your student loan
  • Pay down your tax debt
  • Negotiate lower auto payments

Delay Applying for Any New Credit

Every time you apply for new credit or loans, your lender will pull your credit report. This is known as a "hard pull" or "hard inquiry," which will temporarily cause your score to dip. The more hard credit checks on your credit file, the less desirable your loan application.

Applying for several new credit products could be considered a red flag to lenders, who will view you as a risk.

Final Thoughts

It takes time to clean up your credit file, so start the process as soon as possible if you want to ensure your score is strong enough to secure a mortgage. A good rule of thumb to consider is six to 12 months before applying. This should give you enough time to clear up any inaccuracies and give your score a boost if needed.

Question? We've got answers.

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